Category: Life Insurance Values

“Just fine, thanks,” John responded. “I know why you are calling; it has been a few years since we have been able to get together and we need to speak with you because we have been having some big changes in our family. Jane and I have been meaning to get in touch with you each time we get your email or card in the mail.”

“I never want to be a pest, but I am confident the financial strategies we put in place will make a huge, positive impact on your life.”

“That’s definitely true already. I can’t tell you what a difference the things you’ve taught us have made in our life, and in our thinking. Now that we are on the telephone again, it pains me to think it has been so long. Could we set up a time to meet with you? Maybe next Tuesday at 11:00?” John asked. “Jane and I could both take an early lunch.”

“That will work just fine. I have it written down. See you on Tuesday,” I said.

Present day……

“Jane and John, so nice to see you again. I understand a lot has happened in your lives since we last met, please update me,” I said.

“The most wonderful thing that has happened is we have had two children, sons. Their names are Todd and Jason. Todd is the oldest; he will soon be two. Jason is 10 months old,” Jane proudly announced.

“Pictures?” I asked.

“Oh here let me pull them up on my phone,” Jane said.

John started, “I have been wanting to talk with you about our boys. One of the best things Jane’s parents did for her was to purchase that $100 a month policy. I want to do something that awesome for our boys”

“I think that is a fabulous idea. In fact, I was going to bring it up with you, but you have once again beat me to the punch.” I complimented John. “Are you thinking of doing the same amount as Jane’s parents did for her 33 years ago?”

“I keep going back and forth. At one time I think, sure that is a great place to start. But then I go to the grocery store and realize things are a lot more expensive today. So I am thinking we should do a policy on each of the boys for $200 a month.” John said.

“Here is a picture of the two of them together,” Jane beamed. “I am in favor of the $200 a month for each of them. Since they were born, all I’ve been able to think about is providing the best possible future for them. Purchasing a policy is the best thing we can do. The second best thing will be to educate them on the value of their policies,” Jane said.

“I like the way you are thinking,” I said. “But, before we go further with the policies on the children, do you have any other questions?” I asked.

“Yes, I do. First of all, I’m wondering if you could help me see the ‘big picture’ view of our policies. I also wanted to discuss with you some additional income we have coming in. We’ve both had raises since our last meeting. We’re each taking home about $7,500 more than we were when we set up our original policies. That’s in addition to the $4,800 we’re setting aside for the children’s’ policies.” John explained.

“Great questions. Will you write those down on this piece of paper so we will be sure to cover them?” I slid some paper across my desk to him. “Let’s start with your salaries. You are fortunate to be getting raises and progressing in your careers. What are you thinking would be the best use of the additional- might I say ‘discretionary’- income?”

Looking a Jane, John said, “We have talked this over several times. We can’t think of a better place to put this money than inside our insurance policies. Can we do that?”

“When you purchased your other policies, we designed them right at the MEC limit. As you might remember, that meant you had some wiggle room to decrease your premiums, but very little room to increase your premiums.” I explained.

“Yes, I remember, now that you say that. You said that the MEC limit was not anything to be afraid of, it was simply a trigger to know when we should start another policy. I guess since we have this additional money, and our current policies will not hold that amount of money, we should just do applications for new policies on each of us,” John said.

“John, how would you like to come to work for us in this office?” I smiled at him. “You have a great memory and are right on target with what you said.”

I turned to my Life Insurance Summary calculator and input the numbers displayed on my screen. Now for your question regarding the “big picture,” John. Here’s a calculator that will let us see a summary of all your policies going forward,” I said pointing to my screen.

“So that is how much premium we will be paying including these 4 new policies we’re talking about?” John asked.

“Yes, it is,” I answered. “How much cash value will you have when you turn 40?” I asked him

“That is a lot of money,” Jane exclaimed. “Never in my wildest dreams have I imagined us having that much money. Don’t you think we should do something with it?” Jane asked.

“Go into those ‘wildest dreams’ you just referred to and tell me something you would like to do,” I said to Jane.

“When I was a kid I got to go to Disneyland only once. I want to take the kids to Disneyland.” Looking at John she asked, “Could we do that?”

“Jane, one of the best lessons we have learned here is that we finance everything we buy. How do you propose we finance a trip to Disneyland?” John said.

“As part of our budget, we set aside ‘fun’ money. If we looked at that amount each month as a repayment of a loan against our policies, I am sure we could come up with a budget for the trip.” Jane answered.

I was enjoying the conversation between these two. As I listened, I thought back to our first meeting – they were over $20,000 in credit card debt. I remembered how they wanted to get rid of the policy Jane’s parents had purchased for her. Then the thought occurred to me, how could a 25-year-old couple $20,115 in credit card debt, have over 3 million in assets by the age of 65?

“I do not want to get in the middle of your domestic decision process,” I chuckled. “But when you two first met me, you were $20,115 in credit card debt. In your wildest dreams, would you have ever thought that working with me would allow you to have over $3,000,000 in assets by the time you turned 65?”

“Not a chance,” John answered. “I am not sure that’s even possible now following what you have taught us.”

“Take a look at the projections of your combined policies when you reach 70 years old,” I said pointing the screen.

“Is that for real?” Jane said.

“I can’t believe it,” John said.

“That is the real amount you’re expected to have when you turn 65,” I responded. “Now a word of caution: You are starting to accumulate some cash value. When someone has cash, opportunities seek them out. I mean there is always something that comes up that seems like a good deal. Often though, the deal is not as good as it seems, and might derail this wonderful thing you have going.”

“We are not going to make a major financial decision without talking to you first,” John said emphatically.

“I agree. You have become part of the family. I trust your judgment as much as my own parents,” Jane added.

“OK. I just want to be your coach. Every decision you make should be yours. My intent is to equip you with the right kind of information and education that will allow you to make good decisions.” I said.

You make a Summary inside the Life Insurance Values tool. First copy and paste each enforce policy (go here to see instructions: https://truthconcepts.com/513/) illustration into ONE Life Insurance Values sheet. There is room for 6 whole life and 4 term policies and if you need more, you can make a “Summary of Summaries”. You’ll want to make sure you make good “descriptions” inside the box labeled same so you know which policy is where. Then when you click the Summary button, you’ll get to choose between the 6 PLI buttons and the 4 Term button you want to include. Notice you can also interpolate any of these illustrations, although that is more for a new illustration, not an enforced. You will also want to make sure you have your illustrated age and your current age correct as they will be different for the Summary.

Do PUAs Grow Less Efficient Over Time? Should Clients Buy New Policies to Better Utilize PUAs?

As you know, in the early months and years of a whole life policy, the PUAs are more efficient than the base premium as far as generating cash value for the policy. While the base premium alone can take years to generate a positive internal rate of return where cash value is concerned, the PUAs are converted to cash value right away, which increases the efficiency of the policy overall.

However, after 5-7 years of funding a whole life policy, the impact of the PUAs appears to lessen. Illustrations of a policy funded with maximum PUAs vs. no PUAs at all show that, several years into the policy, the PUAs no longer have a dramatic affect on the internal rate of return of the policy.

For instance, in one example, adding PUAs to a 12k premium whole life policy for the first five years increased the internal rate of return on the net cash value in the 12th year from only .57% (no PUAs) to 3.29% (with 5 years of PUAs) – a difference of 477%! (See illustration 1.)

PUA illustration #1

However, when the PUA is paid for 10 years, the PUAs only bring the IRR up to 3.52%. The difference between 3.29% – the IRR produced when 5 years of PUAs were added to the policy – and 3.52%, the IRR resulting from 10 years of PUAs – is only 6.99%.

PUA illustration #2

Why is this? Do PUAs become less efficient over time?

And what should the client do? After the initial years of the policy, should a policy holder start a new policy and put their PUAs into the new policy to increase the efficiency of the PUAs? Is the “old” whole life policy not the best place for the client’s PUAs?

To test this, Todd compares the effect of transitioning the PUAs to a second new policy after 5 years to see if the average internal rate of return (of the policies combined) is greater when the newer policy receives the PUA payment as opposed to the older policy. This example is given in the first 15 minutes of Todd Langford’s 2013 Think Tank presentation, along with a related discussion (and a hilarious story) about how the numbers alone don’t always tell the whole truth about a situation.

What Todd discovers is this: the combined IRR of both policies when the PUA stays with the first policy is 2.34%, while the IRR of both policies when the PUA shifts to the new policy is a nearly identical 2.32%.

PUA illustration #3

Todd also discovers virtually no difference in internal rates of return when the policies are extended to age 70. (The results are 4.76% and 4.75% IRR of the combined policies when the PUA is shifted from one to the other.)

PUA illustration #4

The conclusion?Starting a new policy is not necessary to increase the effect of a PUA.

Therefore, there is no numerical reason to start a new policy to “increase the efficiency of the PUA.”

However, the numbers alone don’t always tell the whole story.

There may be other reasons to start a new policy. As Todd mentions in the video, starting a new policy creates a new “bucket” into which cash can be stored, which may be very beneficial for the client. Each new policy creates an opportunity to store more cash in the way of PUAs. If a client is easily maxing out their PUAs or must prepare for a way to store additional cash, then it may be time to begin a new policy.

The PUA may appear to lose efficiency, but in fact, it does not. It keeps performing as well as it ever did, but the impact lessens because the base premium catches up over time in its efficiency. Therefore, the PUA does not continue to create as much contrast when compared with the efficiency of the base premium.

A very simple metaphor to understand or explain PUAs vs. base premium efficiency might be that of two joggers. If Jogger A gets a 5-minute head start on a marathon, that will put him or her way ahead of Jogger B in the first few miles. However, by the time they both reach the finish line, that five-minute head start will seem much more insignificant. If they progress at the same speed, at an “average” marathon pace, their times will be less than 2% apart.

In the same way, the differences between the efficiency of a PUA and the base premium become negligible as time goes on. Like the first jogger, the PUA gets a “head start” while the base premium is responsible for establishing the foundation of the policy (paying for the death benefit, commission, and other policy costs), which slows it down, initially.

Ultimately, the PUA will earn (or “run”) at the same pace in an existing or a new policy. The PUA does not grow less efficient with time, the base premium simply becomes more efficient, which narrows the contrast between the two.

The only way to start a new policy and have the PUA earn at a greater rate and efficiency than in an existing policy would be to begin a new policy on a child or grandchild. When this is done, typically, the new policy is more efficient because the cost of insurance is less for a younger person. However, as you are limited as to the amount of insurance you can take on a child – often a maximum of half of what the parent is insured for – you will want to make sure that you are adequately insured.

How do I explain the difference between Total IRR and Annual ROR on Life Values?

The Total Internal Rate of Return is based on the cash value (and we also have one based on the death benefit) and it starts very low and increases over time. It usually shows a negative 100% first year because we have zero cash value in the first year but the IRR appreciates and increases over time. It is however, weighed down by the early years as IRR is a “cumulative” column as opposed to an annual column.

Annual Rate of Return on Cash Value calculates the ROR on the cash value for every year without carrying the baggage from previous years. Whereas the IRR calculation has all the previous negative years that are weighing it down. The annual ROR on Cash value looks at each year separately, so you’ll see a positive annual return on cash value earlier, typically around the 3rd or 4th year, sometimes a bit later.

An issue that is often incorrectly talked about as an advantage, is the idea that the insurance company charges a lower interest when interest is paid up front (in advance) versus at the end (in arrears). The whole truth is that there is a different factor (not a different interest rate) used to calculate the amount of up front interest that has to be paid. This factor can be calculated by reducing the Annual Interest Rate by the Annual Interest Rate. Yes you read that right!

The calculation looks like this. In order to figure out the factor used to calculate the amount of interest to pay in advance, you need to use a Present Value Calculator. Assuming the insurance company states they have a 5.5% loan interest rate, then as shown in the example below, you put 1.00 as Future Value, no payment, 5.5% as the Interest Rate and 1 year. This equals .947867298578199.

When we subtract that .947867298578199 from 1, we get .052132702 so now we know what the beginning of year factor is. It is 5.2133% (rounded).

You can see why people looking at these 2 numbers (5.5 v. 5.21) think that the rate of interest charged is less when paid up front. In reality the annualized rate is 5.5% (the end of year rate) regardless of whether the interest is paid up front or in arrears.

The factor (5.21%) shouldn’t be confused with an interest rate as its only a factor used to determine how much interest to pay when paying up front. It is true that the amount of interest you pay when paying up front is less than the amount of interest you pay when paying at the end of the year, but the reason for that is simply the fact that you didn’t borrow as much money.

For example: if you have a loan of $10,000 at 5.5% APR and you pay the loan at the end of the year, you’ll have to pay back $10,550. If you pay the up front interest of $521.33 (10,000 * .052133) then it means that you’ve only borrowed $9,478.67. When you multiply that $9478.67 by 1.055 (1 + 5.5%, our APR in arrears) it equals $10,000 which means you paid 5.5% on the amount you actually borrowed. Insurance companies bill for their interest up front so they make sure they get the interest.

Another way to look at this is $9478.67 (the amount we actually borrowed) multiplied by 5.5% (interest rate charged in arrears) = 521.33 (the interest charged) and when you add 521.33 to 9478.67 it equals $10,000 so in summary, it is true that you pay less interest when you pay up front because you’ve borrowed less, not because the rate is lower. The rate is exactly the same in both scenarios.

How do I input an inforce ledger into the Life Insurance Values worksheet?

Open the Permanent Life Insurance or Life Insurance Values Tool (you’ll find “Tools” to the right of “Calculators” on your Truth Concepts dashboard.)

Select radio dial “Inforce”. A box will appear asking for Existing Cash amount. Enter the Cashvalue on the policy’s current status report in this box.

Put age and policy year in on top left and fill in description so you’ll know which illustration you copied.

Next to it, an “As of:” box will appear, allowing you to select the date that the status report was ran.

Below that, is a field to enter the next Anniversary date of the policy. This is also on the Status report.

If you do not have access to a Status report and the previous cash value, all you can do is move everything 1 year forward.

So for example, If you are in year 9 of the policy, use year 10 as the starting place (the cash value & DB for the first year in the calculator should be the EOY cash value from year 10 and so-on down the illustration). and use the EOY year 9 cash value as the “Initial Cash Value”.

Once this is entered, populate Current age or policy year, Description, and then paste premium, death benefit and net cashvalue values from the illustration software into the spreadsheet and save.

Premium- Use Net After Tax Outlay column from the illustration and put into Annual Premium column in the PLI Values table.

Policy Loan- If there is a loan on the policy, Use the Cumulative Loan column from the illustration and enter into the Loan Balance column in the PLI Values Table. You use cumulative loan because the loan plus the net cash value is what is actually growing in the policy.